Jim Rickards

Currency wars can last 15 – 20 years. This one started in 2010 with the devaluation of the US dollar and now the US dollar is super strong — currency wars go back and forth.

China has made their move but it won’t be the last move (they’ve already devalued again since this Aug. 11 interview). Canada and Australia will probably try to lower their interest rates to devalue their dollars even further, and then China may do it again. Back and forth.

Collapse could happen at any time. Jim doesn’t see systemic reform on the horizon right away so he expects the currency wars to continue.

This depegging and devaluation is definitely a sign of Chinese economy weakness.

In the book The Death of Money chapter 7 it says that the 7% GDP (Gross Domestic Product) growth number China was putting out was really only about 4%, and today it’s probably about 2 – 3%.

About 75% of China’s GDP is investment and about half of that is completely wasted. Their exports collapsed in July and their imports collapsed also. And even more troubling is that their shadow banking system lending went to zero in June. When you subtract bank lending from total lending you get the shadow bank lending, and it evaporated.

We’ve also seen their stock market collapse. China’s economy is collapsing fast.

The smart money already got out of China. Take a look at the high end condo real estate market in Toronto, Vancouver, Montreal, London, Paris, and all over the world. The smart money — the Chinese princelings (offspring of the communist party elite) and people connected with the communist party — got their money out at the old currency rate and bought high end property in attractive cities.

The everyday Chinese are the ones who suffer.

US INTEREST RATES

There’s no way the Fed can raise interest rates. Jim said that a year ago and this is the last nail in the coffin.

Raising interest rates is deflationary. Right now the US is like a sponge absorbing all the deflation in the world. How on earth is Janet Yellen going to raise rates?

The Fed keeps saying they might raise rates because they’re trying to create a free option. They want to raise rates — no question about it. They want to raise rates and they want inflation, but Janet Yellen has said their decision is data dependent and the data stinks.

Atlanta GDP Tracker shows US 2015 year-to-date GDP growing less than 1.5%. It’s the worst year since 2012. The jobs report was awful. Everyone said unemployment hit 5.3%, but it was also 5.3% the month before so it’s not going anywhere. Job creation stalled out last November and the stock market is down 1,000 points since then.

All the signs in the US are that it’s hitting stall speed.

Jim would have said they can’t raise rates before China devalued the yuan, but now it’s the last nail in the coffin.

The US is a deflationary sponge and it’s hurting their economy, their exports and their jobs.

China and the US are the two biggest economies in the world and together they are about 30% of the world’s GDP. China has hit the breaks and the US is slowing down very rapidly. Canada has it’s own issues with natural resources and the oil patch.

This is global. We’re in a global depression.

Brazil is collapsing. Look at Turkey, Indonesia, Malaysia, Russia — the whole world is slowing down.

EUROPE

Europe is a bright spot but, again, that’s because of the currency wars.

Europe went in stages and from early 2014 to today it has benefitted from the currency wars. Any currency group or country can get a short term benefit by cheapening their currency. The problem is that it doesn’t do anything for the world as a whole and the benefits are temporary. It’s just a matter of time before the other guy shoots back.

So China just shot back at Europe and the US and Canada. Now let’s see what Europe does.

The US is the last guy standing. When are they going to start cheapening their dollar?

China and the US were the peg, and Canada, Australia, New Zealand and everyone else had a cheaper currency and were benefitting.

France and Belgium cheapened their currencies in 1925. England cheapened in 1931. By 1933, in the depth of the Great Depression, the US was the last guy standing so they cheapened their currency against gold.

The problem is that today there is no gold standard.

So the option for the US is to cheapen their currency. They did it in 2011, and the message to the world then was that they had to let the US have a cheap dollar because the US is the biggest economy in the world and if the US goes down they take everyone with them.

Jim’s book Currency Wars came out back in 2011 but it laid out the script for what is happening right now.

Nobody wins a currency war.

It goes back and forth and it doesn’t have an end until one of two things happen:

1. The system collapses as it did in the 1970s, 1930s and just before World War I, and then a new system comes in.

2. You get hyperinflation around the world.

The problem is that every country around the world — Canada, China, Japan — are all easing. Even Ukraine eased the other day.

The one strong currency is the US dollar.

How much longer can the United States stand that? The Federal Reserve will be the last to know how weak the US economy is because their models are wrong. So the Fed won’t wake up to this and they’re not going to have a rate increase.

Right now the world wants US dollars because it looks like there’s going to be an interest rate increase — but there’s not. When that becomes clear, probably in the spring or the late summer, then look for the dollar to go down.

In the village it’s quiet. My herbs are growing and it’s time to start gold panning again.

Here’s the driveway:

I was up at 3 am to watch the Perseid meteor shower, and it’s so dark here and the stars were so bright I could clearly see the milky way. Beautiful streaks of light and my best meteor shower ever, but the camera was not my friend and took pictures that were all black. I need a lesson on how to photograph the night sky.